The future trajectory of the US neutral interest rate hinges on two intertwined factors: one from energy, and the other from employment. Aramco CEO Nasser's inventory warnings have brought the elasticity of oil price inflation to the forefront—global available inventory is less than 10%, and rebuilding could take two years, making energy prices "easy to rise but difficult to fall." On the employment side, micro-analysis by the St. Louis Fed shows that the peak demand occurred as early as April 2023, and the market is shifting from extremely tight to slightly loose, quietly easing inflationary pressures. These two forces offset each other, ultimately keeping the policy rate on a stubbornly high level—this is precisely the theme of this article: how the tug-of-war between oil prices and employment determines the persistently high US neutral interest rate.

Oil prices: Aramco CEO's inventory warning and its impact on US inflation.

Saudi Aramco CEO Nasser's speech at the London Energy Intelligence Forum was centered on a warning of "depleted savings." His data was quite straightforward: global commercial inventories were around 10 billion barrels before the crisis, but now only less than 6 billion barrels remain, with less than 10% actually usable—a shockingly thin figure. The war caused a cumulative supply loss of approximately 3 billion barrels, and the market replenished the gap by drawing on existing inventories of over 1 billion barrels; this storage is essentially the last buffer. Even if the Strait of Hormuz fully reopens and confidence returns, rebuilding inventories could take two years. To meet daily demand while replenishing inventories, the world will need an additional 2 million barrels of supply per day over the next 18 months. The impact on the US is concentrated in refined oil products: Middle Eastern refineries have been damaged, causing fuel prices to rise faster than crude oil, while Chinese refineries have suspended refined oil exports to ensure domestic supply, keeping the crack spread between diesel and gasoline high. Gasoline and diesel are the most sensitive and weighted components of the US CPI, and the expenditure items that residents feel most directly – every cent increase will be transmitted to broader prices through logistics and travel costs. This means that the energy sector has installed a spring that is "easy to rise but difficult to fall" for US inflation: the thinner the inventory and the less buffer there is, the more any new disturbance will be amplified into a steeper price peak, thus continuously delaying the downward process of inflation.

US Employment: The Real Temperature from a Micro Perspective

A recent research article from the Federal Reserve Bank of St. Louis reveals a market that differs slightly from the macroeconomic figures. The national unemployment rate has remained at or below 4.5% for nearly five years, one of the longest periods of low unemployment in modern history, indicating that demand remains fundamentally strong. However, the real issue lies in the structure—labor demand peaked in April 2023, and since then, many regions have clearly cooled down, though the national average has diluted this cooling. The most prominent microeconomic signal is that the "tight job market advantage" is not immune: the deeper the impact of the pandemic in a region, the weaker the recovery of young workers; and even in extremely tight markets with long-term unemployment rates below 3%, the employment advantages accumulated by young people cannot protect them from losses during future slowdowns. In other words, the job market is transitioning from extremely tight to neutral-to-loose, and those with the least experience and weakest skills are the first to feel the chill—their employment vulnerability is often the first to flash a warning sign.

Job prospects: A tug-of-war between resilience and slowdown

Looking ahead, the job market resembles a tug-of-war between resilience and slowdown. On the one hand, the unemployment rate remains low, and while hiring vacancies have declined, they haven't collapsed, supporting labor demand in the service sector, with no signs of a precipitous deterioration in the short term. On the other hand, peak demand has passed, structural differentiation has intensified, and the slowdown in wage growth is paving the way for a more moderate price transmission, which is precisely the prelude to a possible easing of inflationary pressures. The key lies in the pace: if employment only experiences a "moderate cooling," it gives the Federal Reserve room to observe with composure; however, if the cooling evolves into a systemic weakening, it will not only suppress wages but also overall demand—at which point the drag on inflation from employment will clash head-on with the rise in energy prices.

The direction of the neutral interest rate: unlikely to fall.

By focusing on the Federal Reserve's role in both oil prices and employment, the direction of the neutral interest rate becomes clearer. Energy supply shocks are firmly holding inflation in check, while employment is exerting downward pressure. The result of these two forces offsetting each other is that inflation is likely to remain on a more "sticky" platform than expected—neither falling sharply nor rising uncontrollably. This environment dictates that policy rate declines will be quite restrained: as long as inflation stickiness persists and the energy buffer remains insufficient, the Fed will find it difficult to cut rates significantly and continuously, making a "higher and longer" interest rate path more likely to become a reality. In market terms: the neutral interest rate is more likely to hover at a slightly higher level than it is now, rather than falling rapidly. For the dollar, this means strong support and limited downside; for gold and risk assets, persistently high interest rates remain a drag. The real variables still lie in two areas—whether oil prices will surge again due to new supply disruptions, and whether the "mild cooling" of employment will evolve into a "significant weakening." The former raises inflation, while the latter drags down demand. Which one comes first will determine whether the neutral interest rate will remain high or be forced to decline to find a way out.